The economic concentration committee published Tuesday the minutes of its meetings with business leaders, exposing some truisms about the state of the economy that certain business interests evidently tried to obscure over the last year. For example, Eli Yones, the chief executive officer of Bank Mizrahi-Tefahot, confirmed that pyramidal holding groups do wield political influence − and that the CEOs of Israel’s banks can be influenced by moves behind the scenes, out of the regulator’s watchful eye.
It would be better if there were no pyramids at all, said Yones, and if a controlling interest could only be conferred through holdings of 50% or more. (In stacked “pyramid” structures of holdings, the company at the top effectively controls companies at the lower layers, even with holdings well under 50%.) “Of course we’d like everything to be flat, for each company to have a single owner and for the owner to engage only in that,” Yones said. But it isn’t practical for Israel, the banker said.
One has to ask which is the lesser evil, he said − a controlling shareholder with 20% of a given company’s shares, or anonymous shareholders who each hold a few percentages of the company’s stock and influence its management in various hidden ways.
Yones and Bank Hapoalim chairman Yair Seroussi differed on the extent to which the reform of the capital market, formulated by former treasury director-general Joseph Bachar, affected competition in the markets. But both agreed that if anything, banks and institutional investors should be allowed to merge, even though this would likely increase the concentration in the capital market even more.
Even as things are, Yones told the committee members, there is no such thing as an Israeli bank that isn’t too big to be allowed to fail. (More directly: all Israeli banks are too big to be allowed to collapse, said Yones, who was formerly the CEO of Bank Hapoalim.) “There isn’t a single bank whose collapse the economy could tolerate,” because the economy is simply too small, he said.
As for the political influence the pyramids wield, it bears watching, Yones said, but then distinguished between political clout and business might. “I mean, somebody who controls a lot of companies might be able to influence non-business elements in all sorts of ways. It’s completely irrespective of his commercial influence in the market,” Yones said. “If the problem is political clout, then take care of the political clout. There, regulation would definitely be appropriate.”
Pressed about the absence of competition between the banks and concentration in lending, Yones confirmed that even when the banks compete, private households do not particularly benefit from it.
One issue over which Israel’s regulators have been arguing is whether local banks should be controlled by a clear, defined group of shareholders, as is the case of all the banks other than Leumi. Yones supports clear controlling groups, where ownership and responsibility are obvious. Companies without controlling groups are vulnerable to hostile takeovers, and in the case of a financial institution, a hostile takeover can end very badly, he averred.
American and European banks are controlled by groups with interests of 2% that nobody ever sees, Yones said. There are also giant corporations in Europe and the U.S. controlled by groups with a small 2% or 3% interest who give explanations to nobody − yet the CEO needs their cooperation, including to approve his pay, Yones said. “It’s a sort of symbiosis: They do business that nobody sees, they meet in places where nobody sees. I think this is not a good thing. I really do think it better for there to be an owner, even if he isn’t a clear one.”
Rules of corporate governance can be evaded, Yones said, delivering another unwelcome truism. “Corporate governance depends on who wants to impose it ... If the board of directors isn’t truly independent, corporate governance is utterly meaningless.” Yet again that led him to urge that companies have a clear controlling shareholder, even if that shareholder owns only 10% of its stock. “I think it would be great if controlling shareholders had 51% interests. But it isn’t possible, in my opinion. There isn’t that much capital running around in Israel.”
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